Friday, November 18, 2016

Markets churn ahead of holiday week

Dow was off 35, decliners slightly ahead of advancers & NAZ backed off 12.  The MLP index rose 2+ to the 302s & the REIT index was up 1+ to the 323s.  Junk bond funds crawled higher & Treasuries were sold again, taking the yield on the 10 year Treasury up to 2.33%.  Oil was up a little & gold fell again (more on both below).

AMJ (Alerian MLP Index tracking fund)

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Live 24 hours gold chart [Kitco Inc.]

Mario Draghi said the recovery in the euro area isn't yet strong enough to deliver sustained reflation & current monetary support will be a “key ingredient” for the economic outlook in coming years.  “We do not yet see a consistent strengthening of underlying price dynamics,” he said.  “Even if there are many encouraging trends in the euro area economy, the recovery remains highly reliant on a constellation of financing conditions that, in turn, depend on continued monetary support.”  His commitment suggests that the central bank's balance sheet, currently at €3.5T ($3.7T) & with more being added each month, won't shrink for the foreseeable future, even if the exact parameters of the ECB's quantitative easing change.  The Governing Council is set to decide on Dec 8 whether to extend that program beyond Mar 2017.  ECB Chief Economist Peter Praet said policy makers will be in a “good position” at that meeting to assess the inflation outlook & the policy stance.  “Although the euro area recovery is showing signs of resilience, material downside risks remain,” he said.  “Going forward, our assessment will depend on whether we see a sustained adjustment in the path of inflation towards that objective,” Draghi added.  “And that means that inflation convergence towards 2 percent is durable, even with a reduction in monetary accommodation. Inflation dynamics, in other words, need to be self-sustained.”

Draghi Says Recovery Is Still Reliant on ECB Policy Support

Janet Yellen said an interest-rate hike could come “relatively soon”  during testimony yesterday.  Today Dallas Federal Reserve Bank pres Robert Kaplan echoed her outlook.  “I think we are ready to remove some amount of accommodation in the near future. I usually don’t comment on individual meetings but I’ve been saying for the last couple of months we are ready to remove some amount of accommodation and I still feel that way heading into December,” he said.  He also said if fiscal policies help improve growth the Fed will have more leeway in 2017.  “I think we need policies beyond monetary policy. We need infrastructure spending, other economic policies, structural reforms… I think if they are things that actually help improve the path of growth and improve employment then I think it will give us a little more operating room as we head into 2017,” he added.   However he is concerned that the economy is not growing fast enough.  “GDP growth has been sluggish. It’s been sluggish since the great recession. There [are] some good reasons for that. One is the housing sector has been deleveraged, but the other big reason is aging demographics. The workforce is aging which is reducing participation,” he said adding that it would take “broader economic policy” to address this issue.
Oil futures wavered, with volatility expected ahead of a meeting later this month of major oil-producing countries aiming to strike a deal to cut output & stabilize prices.  Oil markets have been in a tug of war this week as major oil producers have tried to indicate optimism about an agreement to cut production, even as a strengthening $ & data showing an unexpectedly large increase in oil supplies have weighed on prices.  West Texas Intermediate futures turned negative, reversing earlier gains.  Prices moved lower despite encouraging statements from major oil producers, indicating they believe OPEC will reach an agreement on output quotas at its Nov 30 meeting.  Iraq's oil minister said he is optimistic about the prospects for an agreement, & that some of the country's issues with the deal have been hashed out.  Iraq had seemed to be the cartel's most intransigent member in recent weeks.  The market has been particularly sensitive to statements coming out of Doha this week, where talks between OPEC members on the sidelines of a gas forum were expected to give some indication of progress toward a deal to cut oil production to between 32.5-33M barrels a day, from record levels of around 33.83M barrels a day in Oct.  Russian Energy Minister Alexander Novak said talks between OPEC & non-OPEC members had proved "positive.  Saudi Energy Minister Khalid al-Falih said yesterday that he is "optimistic" that OPEC's members will formalize the tentative deal they reached in Sep & set production limits for individual countries.  But observers are skeptical about a quick outcome.  The impact of any agreement between OPEC members to lower production could also be offset by surging output from non-OPEC producers, such as Russia, where production hit a post-Soviet high of 11.2M barrels a day in Oct,
Gold futures fell with strength in the $ & expectations that the Federal Reserve will raise interest rates at its meeting next month sending prices down for a 2nd-consecutive week.  Dec gold lost $8.20 (0.7%) for the session to settle at $1208 an ounce.  Prices settled at their lowest level since Feb.

Gold Futures Fall More Than 1% For The Week, Down a Second Week In a Row

Oil futures fell, abandoning a modest move higher in volatile trading, after data showed  that the number of active US rigs drilling for oil climbed by 19 to 471 rigs this week.  The total active rig count, which includes oil & natural-gas rigs, rose 20 to 588.  Dec crude was down 32¢ (0.7%) at $45.12 a barrel.  It was trading at $46.13 before the rig data.

U.S. Oil-rig Count Climbs, Up 11 Out Of The Last 12 Weeks

After the Dow's long run, stocks are resting & that trend should continue next week with the holiday limiting time for trading.  There is supposed to be a huge oil find of shale oil in west Texas.  That has the potential to depress oil prices ahead of the big OPEC meeting at month's end.  After a rough start, the Dow is up almost 1½K this year.  Not bad considering supporting data has been less than impressive. Now the market has to adjust to a rate hike next month by the Fed.

Dow Jones Industrials

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